A Health Care Heads–Up for Individuals

8/1/2010 | Written by: Karen Reed, EA

With the March passage of the Patient Protection and Affordable Care and Health Care and Education Reconciliation Acts, several new penalties, credits, exemptions and other changes have been added to the tax code. This places a great deal of the responsibility for overseeing health care reform into the hands of the IRS. Here are some of the new provisions that apply to individuals:

Beginning in 2010

Individuals with employer–provided health coverage are able to exclude from income amounts paid for health insurance premiums for adult children under the age of twenty–seven. Self–employed individuals are also able to claim a deduction for these premiums.

Medicare beneficiaries affected by the “donut hole” will receive a nontaxable rebate of $250 each. The donut hole is a coverage gap that occurs when expenses are above the limit for basic Medicare coverage but below the catastrophic coverage threshold.

The Adoption Credit has been increased and extended through 2011. Prior to 2010 the credit was nonrefundable; the credit is now refundable, which means it will no longer be limited by tax liability.

Beginning in 2011

Over–the–counter medicines will not be considered qualified medical expenses for health Flexible Spending Accounts (often referred to as “125 Plans” or “Cafeteria Plans”), Health Savings Accounts and Health Reimbursement Accounts, unless they are prescribed by a health care professional.

Employees will have the value of their employer–provided health insurance reported to them on their W–2s (as an informational item only).

Beginning in 2013

Higher income individuals will pay an additional Hospital Insurance (HI) tax of 0.9 percent on the amount of earned income above $200,000 and $250,000 for joint filers. The threshold amount for married individuals filing separately will be $125,000.

Individuals at these income levels also will be subject to an unearned income Medicare contribution tax of 3.8%. The tax will be owed on the lesser of net investment income or amounts exceeding the income threshold.

Flexible savings account contributions will be capped at $2,500 per year.

The threshold for the medical expense deduction will increase from 7.5% to 10% of adjusted gross income. Individuals 65 and older will enjoy a four year exemption from the increase.

Beginning in 2014

Individuals will be required to maintain “minimum essential coverage.” The monthly penalty for failure to carry the minimum essential coverage will be 1/12 of the greater of a flat dollar amount or a percentage of income. The flat dollar and percentage of income amounts will start low but rise to $695 and 2.5%, respectively, by 2016. Joint filers will be jointly and individually liable for any penalty. Individuals with gross incomes below the filing requirement will be exempt from the penalty. An exemption also will apply to religious objectors, members of Native American tribes, incarcerated individuals, and individuals with certain hardships.

Medicare beneficiaries affected by the “donut hole” will receive a nontaxable rebate of $250 each. The donut hole is a coverage gap that occurs when expenses are above the limit for basic Medicare coverage but below the catastrophic coverage threshold.

The government will be offering a refundable tax credit to help certain taxpayers pay for health insurance premiums. The new premium assistance tax credit will be determined based on an individual’s income versus the federal poverty level.

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